In April 2022, HMRC announced a further settlement opportunity, this time for users of remuneration trust tax avoidance schemes, some of which may not fall into the disguised remuneration 2020 settlement opportunity.
The term ‘remuneration trust’ in this instance refers to trusts which are established by businesses to provide a ‘tax free environment’ for the stakeholders, and potentially employees, but aren’t considered Employee Benefit Trusts (EBT) or Employer Financed Retirement Benefits Schemes (EFRBS).
This new settlement opportunity is only available to individuals and companies where the scheme meets certain criteria, as set out in HMRC’s settlement terms. The terms are complex, and should be carefully considered, as there are a number of potential options and different tax consequences, depending on the facts of the scheme used. We can help determine whether you meet the criteria, and the option you would fall under.
Broadly speaking, the opportunity is targeted at users of schemes where a trust is established by the individual or company, but funds are transferred to a primary administrator rather than a bank account under the control of the trust. That primary administrator will then typically transfer those funds to a director, other employee, a shareholder of the company (or for an unincorporated business, the business owner or an employee), or a personal management company controlled by them.
One key point to note is the potential for settlement on the basis the loans were distributions, provided the proportion of loans made to shareholders matches their shareholding. This means tax and NIC savings for both individuals and the company, when compared with settlement on the basis of earnings. This is in contrast to previous settlement opportunities relating to trusts.
In further contrast, and reducing the incentive to settle, HMRC has confirmed that penalties could be charged as part of the settlement. However, this will ultimately depend on the knowledge and behaviour of the users of the scheme, and the advice they received.
Payment by instalments is available where required and HMRC has confirmed in the settlement terms that it will not expect payments of more than 50% of an individual’s disposable income (unless they have a very high disposable income). These are better terms that are likely to be offered should the scheme be defeated at Tribunal. Furthermore, HMRC has made it clear that, in the event a court rules in the future that tax is due on an alternative basis to the scenarios outlined in the terms, those terms will be withdrawn and any scheme users that have not already settled will be expected to pay tax in accordance with the court’s ruling.
This would seem to be a reference to the conflicting First Tier Tribunal cases of Marlborough DP Limited, and Strategic Branding Limited, which were both heard in 2021. The judge in the latter case ruled payments received were subject to PAYE, while in the former the Judge decided the ‘connection test’ to an employee was not met. This presumably led to HMRC’s offer of settlement on the basis the loans are distributions.
The decision in Strategic Branding Limited is the subject of an appeal to the Upper Tier Tribunal (the result of which will be binding on the First Tier), but, at the point of writing, no date has been set. Nevertheless, even if the hearing does not take place before the settlement opportunity ends, there is still a tight window in which to take advantage. As things stand, applications must be made to HMRC by 31 July 2022, and the applicant (or their adviser) must complete tax calculations and submit them with the application.
These calculations are likely to be complex, and we would advise anyone wishing to make an application for the settlement opportunity to seek professional advice.
We have considerable experience in reaching settlements for our clients and mitigating any penalties that HMRC may seek to charge.